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By Christine Benz and Mark Miller | 03-11-2013 03:00 PM

A Longer-Term Outlook on Social Security

Many workers aren't factoring Social Security into their retirement plans, fearing a massive cut to benefits, but how likely is such an event, and what would it mean for retirees?

Christine Benz: Hi, I’m Christine Benz for Morningstar.com. Social Security plays a significant role in many retirees' plans, but younger investors may wrestle with how much to factor it into their own retirement planning. Joining me to discuss that topic is Mark Miller, he is a Morningstar contributor. Mark thank you so much for being here.

Mark Miller: Hi, Christine.

Benz: This is a hot topic Mark, very much in the news today. People are talking about the future of Social Security, whether there will be changes to the plan. Let's start with the current crop of retirees, people who are already retired or maybe getting close to retirement. How should they think about Social Security in relation to their retirement planning?

Miller: Most people who are in retirement or let's say within the 10-year window of filing for Social Security shouldn't expect to see any big changes in their benefits, with one exception. There is the possibility of a change in the annual cost-of-living adjustment, or COLA as people refer to it. People have probably heard in the news this debate about, so called "chained" CPI, which is a technical-sounding description of a change in the way that that automatic cost-of-living adjustment is calculated. The net effect of it would be a reduction in the inflation formula of roughly 3/10 of 1% per year at the beginning, but then that compounds over time. So, if it were put in place today, some projections say that, for example, somebody who retired at 65, by the time they're 80 could be looking at a cumulative loss of about $8,000 in benefits, likewise $19,000 at age 90. So, it's a significant cut, and that's the only thing that's being discussed that could impact people who are close to or on the Social Security program now. And it's something that keeps getting batted around in Washington as something that could happen as part of some grand bargain on deficit reduction.

Benz: So that possible change in the inflation calculation is the big thing to watch if you're someone who is retired currently or getting close to retirement.

Let's discuss the younger set. I've talked to a lot of people, maybe of my age band who are saying, "You know what, I don't factor Social Security into my retirement planning at all." Let's talk about that group, and specifically how they should think about their benefits. Should they factor in the program?

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